US Deficit Soars, Debt Crisis Looms
A year ago, I made a judgment based on a synthesis of public information: the continuous interest rate hikes by the Federal Reserve would lead to a significant increase in debt interest, ultimately threatening the sustainability of the U.S. fiscal situation.
The U.S. Treasury building, facing a severe debt crisis
Just a few months after the U.S. interest rates were raised to 5.5%, the U.S. Treasury has already begun to pay a huge amount of interest on its own $34 trillion national debt, leading to a surge in the fiscal deficit and threatening government operations.
So, how did this happen? Why is it said that high interest rates would endanger the sustainability of U.S. fiscal policy, eventually leading to a surge in government deficits and threatening the U.S. economy?
Today, let's talk about this topic. Writing is not easy, so feel free to like, share, and bookmark.
High interest rates lead to a surge in interest! Can the U.S. fiscal situation hold up?
Before 2022, the total U.S. debt had already reached a scale of $31.5 trillion. As a debtor nation, the U.S. government needs to pay interest on these huge debts every year.
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Fortunately, at that time, Western countries generally adopted a low-interest-rate model, and the U.S. federal funds rate was only 0.25%, so even though the U.S. government's debt scale was very large, the interest expenditure was very small.
The U.S. has long maintained a very low interest rate.
However, due to the Trump administration's helicopter money policy, coupled with the misjudgment of Federal Reserve Chairman Powell, the U.S. quickly fell into an inflation crisis. The highest inflation rate once reached 9.1%.To avoid the U.S. economy falling into stagflation, after hesitating for several months, Powell ultimately resorted to the desperate measure of aggressive interest rate hikes in an attempt to curb domestic inflation.
However, while interest rate hikes can suppress inflation, they come with two significant drawbacks.
The first major drawback is economic recession. The U.S. economy during Trump's era was actually severely impacted by the pandemic, but he forcefully utilized the minting power of the dollar's hegemony to print an enormous amount of dollars, leading to a localized "overheating" of the U.S. economy. Therefore, the goal of inflation is to reduce the amount of dollars in the market, which would then cool down the economy, leading to recession.
To stimulate the economy, Trump literally rained money from helicopters.
And with an economic recession, inflation naturally subsides, as demand decreases. Thus, one of the side effects of interest rate hikes is economic recession, which has already been proven in 2024, and the U.S. economy's GDP growth for this year will also be halved, dropping to around 1.6%.
The second point is the increase in the U.S. government's debt interest expenditure.
In the past three months, the scale of the U.S. fiscal deficit has been $510 billion, exceeding the level of the same period in fiscal year 2023, with a significant increase of 21%, especially with the fiscal deficit in December reaching $129 billion, a substantial year-over-year increase of 52%.
We know that the U.S. has $34 trillion in Treasury debt, but when domestic interest rates in the U.S. increase, their interest expenditures will slowly rise. The U.S. Treasury Department repays maturing U.S. Treasury bonds every year and then reissues a portion of Treasury debt. The newly issued Treasury bonds are subject to the latest interest rates.
The U.S. Treasury Department issues Treasury debt, with new debt subject to higher interest rates.
For example, at the end of 2021, the U.S. had $3 trillion in Treasury debt maturing with an interest rate of 0.25%, and by the end of 2023, when the U.S. government had no money to repay the debt, it continued to issue another $3 trillion in Treasury debt to hedge, which is called "borrowing new to repay old."However, the latest national debt interest rate is not 0.25%, but as high as 5%. This operation means that for these $3 trillion in national debt, the interest expenditure has increased by 20 times!
So this leads to a very frightening situation: the longer the high interest rates last, the more national debt the U.S. Treasury needs to issue. And if the amount of these national debt issues is high, then the Treasury needs to pay 20 times more interest than before.
What about the financial situation in the United States? In the fiscal year of 2024, the fiscal deficit budget submitted by the Biden administration has already reached about $1.8 trillion, for which it has also been attacked by the Republicans in the Senate, who believe they are spending too much money.
U.S. Treasury Secretary Yellen called for attention to the debt crisis.
So the financial situation in the United States is very difficult, with a deficit ratio of about more than 6%, which is more than twice that of China at present. What maintains the United States' large deficit and debt is actually the old foundation of the United States, the "dollar hegemony".
High interest rate crisis, U.S. presidential election? The Federal Reserve's interest rate cut is forced?
Both Powell and Biden know that high interest rates can only be maintained for a while. If the United States really maintains the current interest rate for three years, the U.S. finance will definitely collapse. After all, the estimated deficit for the fiscal year of 2024 has already exceeded $2 trillion.
Let's talk about another set of data. Last year, the financing cost of the U.S. government has already reached as high as $660 billion, which has exceeded 4.73 trillion yuan when converted into yuan, and this is still just the expenditure of interest. So high interest rates are unsustainable because the U.S. finance cannot support it.
Some experts have also calculated that if the 10-year U.S. debt is replaced with a 3.5% interest rate, and if the Federal Reserve cuts interest rates one year in advance, then the U.S. government will save 12% of the annual interest expenditure. So if you want to avoid the ultimate collapse of U.S. debt, the earlier the interest rate cut, the better for the U.S. debt crisis, and the lighter the financial burden.
The total U.S. debt has approached $34 trillion.Therefore, the Federal Reserve's expectation for interest rate cuts this year is actually a compromise in response to the U.S. debt crisis and the excessive interest expenditure. After all, compared to inflation and economic recession issues, the debt issue has become increasingly important and has even become an important reference factor for the three major U.S. rating agencies to judge the health of the U.S. economy.
In addition to economic policies, there are also a series of political factors influencing the Federal Reserve's choices. This is because 2024 is a U.S. election year.
According to opinion poll data, Biden will still compete with Trump this year. The current U.S. President Biden, in order to seek re-election, will naturally want the U.S. economy to be stronger than market expectations this year.
How to make the U.S. economy better? An immediate solution is to raise the U.S. stock market, making the return on investment in the U.S. financial market higher, so that the American people will feel that the economy is "not bad".
This year's Wall Street will inevitably be turbulent.
So historically, every election year, as long as the incumbent president wants to be re-elected, he will generally adopt a loose and water-letting policy to push up the U.S. stock market, with an average annual return rate as high as 15.5%.
So this year is the year when the interest rate hike cycle ends. The Biden administration has already put pressure on the Federal Reserve, hoping that it can cut interest rates as soon as possible to create momentum for Bidenomics.
In summary, regardless of the level of inflation, this year's interest rate cut is certain.
After all, there is already the Federal Reserve's expectation of interest rate cuts; coupled with the Biden administration's need for more relaxed policies to create momentum for the election, and the high interest rates we mentioned that burden the finances, so this year's interest rate cut by the Federal Reserve is certain.The issue lies in whether it will be a rate cut in March or May. For Wall Street investors, American investment institutions, including those around the globe, are all forecasting the Federal Reserve's interest rate cut expectations. As soon as inflation data is released, U.S. Treasury yields and related interest rate cut forecasts will be immediately updated.
For instance, before the release of the CPI index in December, the market anticipated a full-year interest rate cut of 153 basis points in the United States. However, due to a rebound in inflation data, the expected rate cut for this year has been reduced to 140 basis points.
But we must understand that no matter how economic data changes, the overall economic cycle is essentially unchangeable, and the Federal Reserve does not have that capability. Therefore, how to better live, work, and survive in the recessionary year of 2024, and to achieve better returns during the interest rate cut cycle, is what we need to judge and consider.
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